[Federal Register Volume 63, Number 132 (Friday, July 10, 1998)]
[Notices]
[Pages 37426-37430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18414]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40157; File No. SR-Amex-96-44]


Self-Regulatory Organizations; Order Granting Approval of a 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval of Amendment Nos. 3, 4, 5 and 6 to the Proposed 
Rule Change by the American Stock Exchange, Inc. Relating to the 
Listing and Trading of Options on Exchange-Traded Fund Shares

July 1, 1998.

I. Introduction

    On November 21, 1996, the American Stock Exchange, Inc. (``Amex'' 
or ``Exchange''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
a proposed rule change to list and trade options on securities 
representing interests in open-end, exchange-listed investment 
companies that hold securities constituting or based on an index or 
portfolio of securities (``Exchange-Traded Fund Shares'' or ``Fund 
Shares''). The Exchange filed Amendment Nos. 1 and 2 to the proposal on 
January 16, 1997, and February 19, 1997, respectively.\3\ Notice of the 
proposal, and Amendment Nos. 1 and 2 appeared in the Federal Register 
on February 25, 1997.\4\ No comment letters were received on the 
proposed rule change. On January 7, 1998, the Amex filed Amendment No. 
3 to the proposed rule change.\5\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment Nos. 1 and 2 have been replaced and superseded by 
Amendment No. 5.
    \4\ See Securities Exchange Act Release No. 38308 (February 19, 
1997), 62 FR 8467.
    \5\ See Letter from Claire P. McGrath, Vice President & Senior 
Counsel, Amex, to Sharon Lawson, Senior Special Counsel, Office of 
Market Supervision (``OMS''), Division of Market Regulation 
(``Division''), dated January 6, 1998 (``Amendment No. 3''). 
Amendment No. 3 makes a number of changes to the proposal which are 
discussed herein.
---------------------------------------------------------------------------

    Among other things, Amendment No. 3 revises the proposal to permit 
the Amex to trade FLEX Equity options on Fund Shares. On March 12, 
1998, the Amex filed Amendment No. 4 to the proposal \6\ and on April 
28, 1998, the Exchange filed Amendment No. 5.\7\ Finally, on June 19, 
1998, the Exchange filed Amendment No. 6 to the proposed rule 
change.\8\ This order approves the

[[Page 37427]]

Exchange's proposal, and Amendment Nos. 3, 4, 5, and 6 on an 
accelerated basis.
---------------------------------------------------------------------------

    \6\ See Letter from Claire P. McGrath, Vice President and 
Special Counsel, Amex, to Sharon Lawson, Senior Special Counsel, 
OMS, Division, Commission, dated March 11, 1998 (``Amendment No. 
4''). Amendment No. 4 provides that options on Fund Shares can 
either meet the uniform options listing standards set forth in Rule 
915 and commentary .01 thereunder or meet the criteria set forth in 
proposed commentary .06 to Rule 915. The portion of Amendment No. 4 
that addresses comprehensive surveillance sharing agreements with 
regard to non-U.S. stocks in the index or portfolio on which the 
fund shares are based has been replaced and superseded by Amendment 
No. 5.
    \7\ See Letter from Claire P. McGrath, Vice President and 
Special Counsel, Amex, to Sharon Lawson, Senior Special Counsel, 
OMS, Division, Commission, dated April 27, 1998 (``Amendment No. 
5''). In Amendment No. 5 the Amex proposes the following 
surveillance sharing standard: (1) that any Fund Share with non-U.S. 
stocks in the underlying index or portfolio that are not subject to 
comprehensive surveillance sharing agreements do not in the 
aggregate represent more than 50% of the weight of the index or 
portfolio; (2) stocks for which the primary market is in anyone 
country that is not subject to a comprehensive surveillance 
agreement do not represent 20% or more of the weight of the index; 
and (3) stocks for which the primary market is in any two countries 
that are not subject to comprehensive agreements do not represent 
33% or more of the weight of the index. Amendment No. 5 supersedes 
and replaces Amendment Nos. 1 & 2, and the portion of Amendment No. 
4 that addresses surveillance sharing.
    \8\ See Letter from Claire P. McGrath, Vice President and 
Special Counsel, Amex, to Sharon Lawson, Senior Special Counsel, 
OMS, Division, Commission, dated June 19, 1998 (``Amendment No. 
6''). In Amendment No. 6 the Exchange clarifies that Fund Shares 
that hold securities based upon a narrow-based index or portfolio 
must have options margin that equals at least 100% of the current 
market value of the contracts plus 20% of the market value of 
equivalent units of the underlying security value.
---------------------------------------------------------------------------

II. Description of the Proposal

    The purpose of the proposed rule change is to provide for the 
trading of options and FLEX Equity options \9\ on Fund Shares. As noted 
above, Fund Shares are exchange-listed securities representing 
interests in open-end unit investment trusts or open-end management 
investment companies (``Funds'') that hold securities based on an index 
or a portfolio of securities.\10\ Fund Shares are issued in exchange 
for an ``in kind'' deposit of a specified portfolio of securities, 
together with a cash payment, in minimum size aggregations or multiples 
thereof (``Creation Units''). The size of the applicable Creation Unit 
size aggregation is set forth in the Fund's prospectus, and varies from 
one series of Fund Shares to another, but generally is of substantial 
size (e.g., value in excess of $450,000 per creation unit). A Fund, 
generally, will issue and sell Fund Shares in Creation Unit size 
through a principal underwriter on a continuous basis at the net asset 
value per share next determined after an order to purchase Fund Shares 
and the appropriate securities are received. Following issuance, Fund 
Shares are traded on an exchange like other equity securities, and 
equity trading rules apply. Likewise, redemption of Fund Shares is made 
in Creation Unit size and ``in kind,'' with a portfolio of securities 
and cash exchanged for the Fund Shares that have been tendered for 
redemption.
---------------------------------------------------------------------------

    \9\ In general, FLEX Equity options provide investors with the 
ability to customize basic option features including size, 
expiration date, exercise style, and certain exercise prices.
    \10\ Currently, the Exchange trades unit investment trust 
securities known as Portfolio Depository ReceiptsSM (``PDRs'') based 
on the Standard & Poor's 500<Register> Composite Stock Price Index, 
the Standard & Poor's MidCap 400 Index, and the Dow Jones Industrial 
Average. In addition, the Exchange trades Index Fund Shares which 
are issued by an open-end management investment company consisting 
of seventeen separate series known as World Equity Benchmark 
SharesSM (``WEBS'') based on seventeen foreign equity market 
indexes. PDRs and WEBS are listed on the Amex pursuant to Rule 1000, 
et seq. and Rule 1000A et seq., respectively, and trade like shares 
of common stock. The Commission notes that not all PDRs or WEBS 
currently trading on the Amex may meet the standards for options 
trading approved by this order.
---------------------------------------------------------------------------

    Generally, options on Exchange-Traded Fund Shares are proposed to 
be traded on the Exchange pursuant to the same rules and procedures 
that apply to trading in options on equity securities. However, the 
Exchange is also proposing to list FLEX Equity options on Fund Shares 
and some options will have a unit of trading of 1000 Exchange-Traded 
Fund Shares. The Exchange will list option contracts covering either 
100 or 1000 Fund Shares, or both, depending on the price and volatility 
of the underlying Fund Shares and the popularity of the options.\11\ 
Strike prices for both the 100 and 1000 share contracts will be set to 
bracket the Fund Shares at one point intervals up to a share price of 
$200.\12\ The proposed position and exercise limits for options on Fund 
Shares would be the same as those established for stock options as set 
forth in Amex Rules 904 and 905. The Amex anticipates that most options 
on Fund Shares initially will qualify for only the lowest position 
limit. As with standardized equity options, the position limits will be 
increased for options if the volume of trading in the Fund Shares 
increases to meet the requirements of a higher limit.\13\ As is 
currently the case for all FLEX Equity options, no position and 
exercise limits will be applicable to FLEX Equity options overlying 
Fund Shares until, at least, September 9, 1999.\14\
---------------------------------------------------------------------------

    \11\ See Amendment No. 3, supra note 5. In the event the 
Exchange lists options covering both 100 and 1000 of the same 
underlying Fund Shares, the Exchange will assign separate trading 
symbols to the options and will issue an Information Circular to all 
its members advising of the trading symbols. Telephone conversation 
between Claire P. McGrath, Vice President & Senior Counsel, Amex, 
and James T. McHale, Special Counsel, OMS, Division, Commission, on 
June 17, 1998.
    \12\ See Amendment No. 3, supra note 5.
    \13\ Id. 
    \14\ See Securities Exchange Act Release No. 39032 (September 9, 
1997) (Order eliminating position and exercise limits for FLEX 
Equity options on a two year pilot basis) (``FLEX Equity Position 
Limit Pilot'').
---------------------------------------------------------------------------

    The listing and maintenance standards proposed for options on 
Exchange-Traded Fund Shares are set forth in proposed Commentary .06 
under Exchange Rule 915 and in proposed Commentary .08 under Exchange 
Rule 916, respectively. Pursuant to the proposed initial listing 
standards, Amex only will list Fund Shares that are principally traded 
on a national securities exchange or through the facilities of a 
national securities association and reported as national market 
securities. In addition, the initial listing standards require that 
either: (1) the Fund Shares meet the uniform options listing standards 
in Commentary .01 to Rule 915, which include minimum public float, 
trading volume, and share price of the underlying security in order to 
list the option; \15\ or (2) the Exchange-Traded Fund Shares must be 
available for creation or redemption each business day in cash or in 
kind from the Fund at a price related to the net asset value, and the 
Exchange will require that the underlying Fund Shares may be created 
even though some or all of the securities needed to be deposited have 
not been received by the Fund.\16\
---------------------------------------------------------------------------

    \15\ Specifically, Commentary .01 to Rule 915 requires the 
underlying security to have a public float of 7,000,000 shares, 2000 
holders, trading volume of 2,400,000 shares in the preceding 12 
months, a share price of $7.50 for the majority of the business days 
during the three calendar months preceding the date of the 
selection, and that the issuer of the underlying security is in 
compliance with the Act.
    \16\ Provided the authorized creation participant has undertaken 
to deliver the shares as soon as possible and such undertaking has 
been secured by the delivery and maintenance of collateral 
consisting of cash or cash equivalents satisfactory to the Fund 
which underlies the option, as described in the Fund prospectus. See 
Amendment No. 3, supra note 5.
---------------------------------------------------------------------------

    In addition, the initial listing standards require that: (1) any 
Fund Share with non-U.S. stocks in the underlying index or portfolio 
that are not subject to comprehensive surveillance agreements do not in 
the aggregate represent more than 50% of the weight of the index or 
portfolio; (2) stocks for which the primary market is in any one 
country that is not subject to a comprehensive surveillance agreement 
do not represent 20% or more of the weight of the index or portfolio; 
and (3) stocks for which the primary market is in any two countries 
that are not subject to comprehensive surveillance agreements do not 
represent 33% or more of the weight of the index or portfolio.\17\
---------------------------------------------------------------------------

    \17\ See Amendment No. 5, supra note 7.
---------------------------------------------------------------------------

    The Exchange's proposed maintenance standards provide that if a 
particular series of Exchange-Traded Fund Shares should cease to trade 
on an exchange or as national market securities in the over-the-counter 
market, there will be no opening transactions in the options on the 
Fund Shares, and all such options will trade on a liquidation-only 
basis. In addition, the Amex will consider the suspension of opening 
transactions in any series of options of the class covering Fund Shares 
if: (1) the options fail to meet the uniform equity option maintenance 
standards Commentary .01 to Rule 916,\18\ when the options were listed 
pursuant to the equity option listing

[[Page 37428]]

standards of Commentary .01 to Rule 915;\19\ (2) following the initial 
twelve-month period beginning upon the commencement of trading of the 
Fund Shares on a national securities exchange or as national market 
securities through the facilities of a national securities association 
there are fewer than 50 record and/or beneficial holders of Fund Shares 
for 30 or more consecutive trading days; (3) the value of the index or 
portfolio of securities on which the Fund Shares are based is no longer 
calculated or available; or (4) such other event shall occur or 
condition exist that in the opinion of the Exchange makes further 
dealing in such options on the Exchange inadvisable.
---------------------------------------------------------------------------

    \18\ Specifically, Commentary .01 to Rule 916 provides that an 
underlying security will not meet the Exchange's requirements for 
continued listing when, among other things; (1) there are fewer than 
6 300,000 publicly-held shares; (2) there are fewer than 1600 
holders; (3) trading volume was less than 1,800,000 shares in the 
preceding twelve months; and (4) the share price of the underlying 
security closed below $5 on a majority of the business days during 
the preceding 6 months.
    \19\ See Amendment No. 4, supra note 6. The Commission notes 
that even if options on Fund Shares were not listed under the 
uniform equity option listing standards, Amex Rules 1002 and 1002A 
require a minimum number of Fund Shares to be outstanding before 
trading in a series of Fund Shares may commence. In addition, the 
Amex has represented that although there is no comparable public 
float maintenance standard for the underlying Fund Shares, as a 
practical matter there can never be trading in a series of Fund 
Shares in which there is less than one Creation Unit outstanding, 
since Fund Shares only may be created and redeemed in Creation Unit 
size, and if the last outstanding Creation Unit should ever be 
redeemed, the series (and the options on that series) will cease to 
trade.
---------------------------------------------------------------------------

    Options on Fund Shares will be physically-settled and will have the 
American-style exercise feature used on all standardized equity 
options, and not the European-style feature originally proposed.\20\ 
The Exchange, however, also proposes to trade FLEX Equity options which 
will be available with both the American-style and European-style 
exercise feature, as well as other FLEX Equity features.\21\
---------------------------------------------------------------------------

    \20\ See Amendment No. 3, supra note 5. An American-style option 
may be exercised at any time prior to its expiration. A European-
style option, however, may be exercised only on its expiration date.
    \21\ Id.
---------------------------------------------------------------------------

    The proposed margin requirements for options on Exchange-Traded 
Fund Shares are at the same levels that apply to options generally 
under Exchange Rule 462, except, with respect to Fund Shares based on a 
broad-based index or portfolio, and those Fund Shares approved by the 
Commission to date, minimum margin must be deposited and maintained 
equal to 100% of the current market value of the option plus 15% of the 
market value of equivalent units of the underlying security value. Fund 
Shares that hold securities based upon a narrow-based index or 
portfolio must have options margin that equals at least 100% of the 
current market value of the contract plus 20% of the market value of 
equivalent units of the underlying security value.\22\ In this respect, 
the margin requirements proposed for options on Exchange-Traded Fund 
Shares are comparable to margin requirements that currently apply to 
broad-based and narrow-based index options.
---------------------------------------------------------------------------

    \22\ See Amendment No. 6, supra note 8.
---------------------------------------------------------------------------

    The Exchange believes it has the necessary systems capacity to 
support the additional series of options that would result from the 
introduction of options on Fund Shares, and it has been advised that 
the Options Price Reporting Authority (``OPRA'') also will have the 
capacity to support these additional series now that it has implemented 
an additional outgoing high speed line from the OPRA processor.\23\
---------------------------------------------------------------------------

    \23\ See letter from Joseph P. Corrigan, Executive Director, 
OPRA, to Ivette Lopez, Assistant Director, OMS, Division, 
Commission, dated November 8, 1996.
---------------------------------------------------------------------------

III. Commission Findings and Conclusions

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, the requirements of Section 6(b)(5).\24\ Specifically, the 
Commission believes that providing for the listing and trading of 
options and FLEX Equity options \25\ on Exchange-Traded Fund Shares 
should give investors a better means to hedge their positions in the 
underlying Fund Shares. Further, the Commission believes that pricing 
of the underlying Fund Shares may become more efficient and market 
makers in these shares, by virtue of enhanced hedging opportunities, 
may be able to provide deeper and more liquid markets. In sum, the 
Commission believes that options on Fund Shares likely will engender 
the same benefits to investors and the market place that exist with 
respect to options on common stock,\26\ thereby serving to promote the 
public interest, remove impediments to a free and open securities 
market, and promote efficiency, competition, and capital formation.\27\
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f(b)(5).
    \25\ The Commission hereby incorporates by reference its 
findings and conclusions with respect to the appropriateness of FLEX 
Equity options generally. See Securities Exchange Act Release No. 
37336 (June 19, 1996), 61 FR 33558 (June 27, 1996).
    \26\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of any new securities product upon a finding that 
the introduction of such new product is in the public interest. Such 
a finding would be difficult for a derivative instrument that served 
no hedging or economic function, because any benefits that might be 
derived by market participants likely would be outweighed by the 
potential for manipulation, diminished public confidence in the 
integrity of the markets, and other valid regulatory concerns.
    \27\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    As a general matter, the Commission believes that a regulatory 
system designed to protect public customers must be in place before the 
trading of sophisticated financial instruments, such as options on Fund 
Shares, can commence trading on a national securities exchange. The 
Commission notes that the trading of standardized exchange-traded 
options occurs in an environment that is designed to ensure, among 
other things, that: (1) The special risks of options are disclosed to 
public customers; (2) only investors capable of evaluating and bearing 
the risks of options trading are engaged in such trading; and (3) 
special compliance procedures are applicable to options accounts. With 
regard to position and exercise limits, the Commission finds that it is 
appropriate to adopt the tiered approach used in setting position and 
exercise limits for standardized stock options. This approach should 
serve to minimize potential manipulation and market impact concerns. In 
addition, the Commission believes that the rationale for allowing FLEX 
Equity options generally to trade without position and exercise limits 
until September 9, 1999, is equally applicable in the context of FLEX 
Equity options on Fund Shares.\28\ Accordingly, because options and 
FLEX Equity options on Fund Shares will be subject to the same 
regulatory regime as the other options and FLEX Equity options 
currently traded on the Amex, the Commission believes that adequate 
safeguards are in place to ensure the protection of investors in 
options and FLEX Equity options on Fund Shares.
---------------------------------------------------------------------------

    \28\ See FLEX Equity Position Limit Order, supra note 14. 
Pursuant to the FLEX Equity Position Limit Pilot, the Commission 
expects the Amex to include its experience with FLEX Equity options 
on Fund Shares in its report to the Commission.
---------------------------------------------------------------------------

    The Commission also believes that it is appropriate to permit the 
Amex to list and trade options, including FLEX Equity options, on 
Exchange-Traded Fund Shares given that these options must meet specific 
requirements related to the protection of investors.\29\ First, the 
Exchange's listing and delisting criteria for options on Fund Shares 
are adequate. With regard to initial listing, the proposal requires 
that either: (1) the

[[Page 37429]]

underlying Fund Shares meet the Amex's uniform options listing 
standards; or (2) the Exchange-Traded Fund Shares must be available for 
creation or redemption each business day in cash or in kind from the 
Fund at a price related to the net asset value, and the Exchange will 
require that the underlying Fund Shares may be created even though some 
or all of the securities needed to be deposited have not been received 
by the Fund.\30\ This listing requirement should ensure that there 
exists sufficient supply of the underlying Fund Shares so that a short 
call writer, for example, will have the ability to secure delivery of 
the Fund Shares upon exercise of the option.
---------------------------------------------------------------------------

    \29\ The Commission notes, and Amex has verified, that holders 
of options on Fund Shares who exercise and receive the underlying 
Fund Shares must receive, like any purchaser of Fund Shares, a 
product description or prospectus, as appropriate. Telephone 
Conversation between Claire P. McGrath, Vice President and Senior 
Counsel, Amex, Sharon Lawson, Senior Special Counsel, OMS, Division, 
Commission, and James McHale, Special Counsel, OMS, Division, 
Commission, on June 25, 1998.
    \30\ Provided the authorized creation participant has undertaken 
to deliver the shares as soon as possible and such undertaking has 
been secured by the delivery and maintenance of collateral 
consisting of cash or cash equivalents satisfactory to the Fund 
which underlies the option, as described in the Fund prospectus.
---------------------------------------------------------------------------

    In reviewing the Amex's proposal, as originally submitted, the 
Commission had been concerned with the ability to produce Fund Shares 
upon exercise of the option. The Commission believes the Amex has 
adequately addressed these concerns through the adoption of the listing 
standards set forth above. In particular, options listed pursuant to 
the uniform options listing standards will have to meet the options 
maintenance listing standards which require, among other things, that a 
minimum number of Fund Shares be outstanding to continue trading the 
options.\31\ The alternative listing criteria, noted above, should also 
help to ensure that the underlying Fund Shares will be available upon 
exercise by requiring the Fund to allow market participants to create 
Fund Shares even though some or all of the necessary securities needed 
to be deposited are not available.\32\ Although there is no absolute 
assurance that market participants will go ahead and create Fund Shares 
in the event a short call writer needs to purchase Fund Shares to meet 
an exercise notice, it is likely that arbitrage opportunities will 
create an incentive to do so. Further, in the event there are not 
enough Fund Shares to meet exercise requirements, as with other 
physically-settled equity options, the Options Clearing Corporation 
(``OCC'') has rules that would apply to such situations.
---------------------------------------------------------------------------

    \31\ See supra note 18.
    \32\ See supra note 30.
---------------------------------------------------------------------------

    Second, the Commission believes that the surveillance standard 
developed by the Amex for options on Fund Shares is adequate to address 
the concerns associated with the listing and trading of such 
securities. Specifically, the Amex has proposed that: (1) any Fund 
Share with non-US stocks in the underlying index or portfolio that are 
not subject to comprehensive surveillance agreements do not in the 
aggregate represent more than 50% of the weight of the index or 
portfolio; (2) stocks for which the primary market is in any one 
country that is not subject to a comprehensive surveillance agreement 
do not represent 20% or more of the weight of the index or portfolio; 
and (3) stocks for which the primary market is in any two countries 
that are not subject to comprehensive surveillance agreements do not 
represent 33% or more of the weight of the index or portfolio.\33\
---------------------------------------------------------------------------

    \33\ The Exchange uses the term ``comprehensive surveillance 
agreement'' to mean an agreement which requires that the parties 
provide each other, upon request, information about market trading, 
clearing activity under the identity of the ultimate purchasers and 
sellers of securities. Telephone conversation between Claire P. 
McGrath, Vice President and Senior Counsel, Amex, and James T. 
McHale, Special Counsel, OMS, Division, Commission, on June 17, 
1998.
---------------------------------------------------------------------------

    As a general matter, the Commission believes that comprehensive 
surveillance agreements provide an important deterrent to manipulation 
because they facilitate the availability of information needed to fully 
investigate a potential manipulation if it were to occur. These 
agreements are especially important in the content of derivative 
products based on foreign securities because they facilitate the 
collection of necessary regulatory, surveillance and other information 
from foreign jurisdictions. In evaluating the current proposal, the 
Commission believes that requiring comprehensive surveillance 
agreements to be in place between the Amex and the primary markets for 
foreign securities that comprise 50% or more of the weight of the 
underlying index or portfolio upon which Fund Shares are based, as well 
as the other conditions discussed above, provides an adequate mechanism 
for the exchange of surveillance sharing information necessary to 
detect and deter possible market manipulations. Although the Commission 
recognizes that up to 50% of the Portfolio's value may not be covered 
by comprehensive surveillance agreements, the other requirements will 
ensure that a significant percentage of the portfolio is not made up of 
securities from uncovered countries. Further, as to the domestically-
traded Fund Shares themselves and the domestic stocks in the underlying 
index or portfolio upon which Fund Shares are based, the Intermarket 
Surveillance Group (``ISG'') \34\ Agreement will be applicable to the 
trading of options on Fund Shares.\35\
---------------------------------------------------------------------------

    \34\ ISG was formed on July 14, 1983, to, among other things, 
coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets. 
See Intermarket Surveillance Group Agreement, July 14, 1983. The 
members of ISG include all of the registered National Securities 
Exchanges and the National Association of Securities Dealers, Inc. 
(``NASD''). In addition, the major stock index futures exchanges 
(e.g., the Chicago Mercantile Exchange and the Chicago Board of 
Trade) are affiliate members of ISG.
    \35\ For example, the ISG Agreement would allow for the exchange 
of surveillance and investigative information between the Amex, 
trading PDRs on the S&P 500 index, and the markets trading the 500 
stocks represented in the S&P 500 index. In addition, should other 
markets begin trading Fund Shares in the future, trading information 
with regard to the Fund Shares themselves would be readily available 
to the Amex pursuant to the ISG and the Amex could list options on 
those Fund Shares, assuming the options met all of the listing 
standards and requirements discussed herein.
---------------------------------------------------------------------------

    Finally, the Commission believes that it is appropriate to require 
minimum margin of 100% of the current market value of the option plus 
15% of the market value of the underlying security value (``broad-based 
margin'') for options on Fund Shares based on a broad-based index or 
portfolio and for options on Fund Shares which have been approved to 
date.\36\ Moreover, the Commission believes that requiring minimum 
margin of 100% of the current market value of the option plus 20% of 
the market value of the underlying security value (``narrow-based 
margin'') for options on Fund Shares based on a narrow-based index or 
portfolio is appropriate.\37\ The Commission notes that these margin 
requirements for options on Exchange-Traded Fund Shares are comparable 
to margin requirements that currently apply to broad-based and narrow-
based index options.
---------------------------------------------------------------------------

    \36\ The Commission notes that the portfolios or indexes 
comprising WEBS have not been designated as broad-based by the 
Commission. In this order, the Commission is only determining that 
broad-based margin treatment for the WEBS is appropriate, without 
addressing the issue of whether such WEBS are broad-based.
    \37\ See Amendment No. 6, supra note 8.
---------------------------------------------------------------------------

    The Commission finds good cause for approving Amendment Nos. 3, 4, 
5, and 6 to the proposed rule change prior to the thirtieth day after 
the date of publication of notice thereof in the Federal Register. 
Amendment No. 3, strengthens the proposal by: (1) providing that the 
Exchange will not list options on Fund Shares unless the Fund has 
agreed to issue Fund Shares even though some or all of the securities 
needed to be deposited have not been received, thus ensuring a minimum 
level of liquidity; and (2) adopting standardized options position and 
exercise limits. Amendment No. 3 also: (1) provides the options on Fund 
Shares

[[Page 37430]]

shall have the American-style exercise feature; (2) allows for the 
trading of FLEX Equity options on Fund Shares; (3) permits the Exchange 
to list options on Funds Shares covering 100 or 1000 Fund Shares or 
both; (4) sets strike prices for both 100 and 1000 share contracts to 
bracket the Fund Shares price at one point intervals up to a share 
price of $200; and (5) makes various non-substantive references to 
``Exchange-Traded Fund Shares'' throughout Amex's Rules, where 
appropriate. The Commission finds that these changes are not 
controversial because they do not alter the fundamental nature of the 
proposal.
    Amendment No. 4 provides the Exchange with the flexibility to list 
Fund Shares pursuant to the uniform option listing standards in Rule 
915 and Commentary .01, in lieu of obtaining a commitment from the unit 
investment trust or management investment company to issue Fund Shares 
even though some or all of the securities needed to be deposited have 
not been received. The Commission believes that this strengthens the 
proposal because the uniform option listing standards help to ensure 
that the Fund Shares underlying the options are actively traded, with 
substantial public float and number of holders. That portion of 
Amendment No. 4 that addresses comprehensive surveillance sharing 
agreements has been replaced and superseded by Amendment No. 5.
    The Commission also believes that Amendment No. 5, concerning 
surveillance requirements, strengthens the Amex's proposal. Amendment 
No. 5, provides a clear, objective standard for determining the 
comprehensive surveillance requirements for trading options on Fund 
Shares where the underlying index or portfolio contains non-U.S. 
stocks.
    The Commission finds that Amendment No. 6 also strengthens the 
Amex's proposal. Amendment No. 6 provides that the Amex will apply 
narrow-based margin to options on Fund Shares which are based on a 
narrow-based index or portfolio of securities. This requirement should 
ensure that purchasers of options on Fund Shares based on a narrow-
based index or portfolio post sufficient margin to address any concerns 
associated with the potentially increased volatility inherent in a 
narrow-based index.
    Finally, the Commission notes that no comments were received on the 
original Amex proposal, which was subject to full 21-day comment 
period. Accordingly, the Commission believes that there is good cause, 
consistent with Section 6(b)(5) of the Act, to approve Amendment Nos. 
3, 4, 5, and 6 to the proposed rule change on an accelerated basis.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 3, 4, 5 and 6 to the proposed rule 
change, including whether the Amendments are consistent with the Act. 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Section, 450 Fifth Street, N.W., Washington, D.C. Copies of 
such filing will also be available for inspection and copying at the 
principal office of the Amex. All submissions should refer to File No. 
SR-Amex-96-44 and should be submitted by July 31, 1998.
    For the foregoing reasons, the Commission finds that the Amex's 
proposal to list and trade options and FLEX Equity Options on Fund 
Shares is consistent with the requirements of the Act and the rules and 
regulations thereunder.

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\38\ that the proposed rule change (File No. SR-Amex-96-44), as 
amended, is approved.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\39\
---------------------------------------------------------------------------

    \39\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18414 Filed 7-9-98; 8:45 am]
BILLING CODE 8010-01-M